Investing in airlines

Ask The Fool

Look Out, Orville!

Q: Is it a good time to invest in airlines?

A: Some have suggested it's never a good time. Superinvestor Warren Buffett, for example, has said that "if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down."

The airline industry has to deal with challenges such as volatile fuel costs, fare wars, expensive equipment, union negotiations, complicated scheduling logistics and costly empty seats. Southwest Airlines has been a rare success in the industry — but even its 10-year average annual stock return is negative.

Q: Might a company that rakes in a lot of money still be a bad investment?

A: It's possible. Remember — the money a company takes in (its revenue, or sales) is its top line. Before you get to its bottom line of profits, you have to take out expenses, such as salaries, supplies and taxes. It's critical to know how much (if anything) the company keeps as profit, and whether important numbers, such as sales and profits, are increasing.

Las Vegas Sands' sales, for example, have risen from $2.2 billion in 2006 to $4.4 billion in 2008, while its net income has fallen into negative territory.

That's worrisome, but ailing companies can be good investments sometimes — if they turn themselves around. Study their financial reports, to determine whether they're gaining or losing market share, how strong their competitive advantages areand whether their futures seem bright.

Look for red flags such as major legal problems or investigations into accounting.

Or just focus instead on profitable firms.

The Motley Fool take

Peering at Windows 7

Microsoft (Nasdaq: MSFT) plans to replace the Vista operating system with Windows 7 in October.

As Windows 7 steps into the fray, Microsoft is facing entirely new challenges, such as strong competitors and the rise of the netbook system that places new demands on the operating system.

Laptops are getting smaller and less impressive, while smartphones only get more powerful.

The convergence of those two trends is putting new operating systems from Microsoft competitors on netbooks. And now even mobile-service providers such as AT&T and Verizon are selling netbooks.

Nonetheless, Microsoft looks prepared for these challenges. Windows 7 was designed with the red-hot netbook market in mind, so it's a fair fight.

It looks like Microsoft is going to ring up a lot of fresh operating-system sales this fall. And isn't that what the company is all about, anyway?

It's back to the basics for Microsoft, and that may make investors like both the company and the stock again.